Bluepoint daily market view – September 7, 2011
A tale of two countries – US and Germany. If we take a look at the two countries economies, we see very different economic dynamics. The US is now at around 1.4% GDP growth and German GDP growth is about 2.6%, unemployment in the US is officially 9.1% and in Germany it is about 5.6% – in today”s economic crisis environment this is a dramatic difference. Why? One thing we can look at is income distribution. Take a look at the thumbnail chart of the US income distribution curve and below at the German income distribution curve (sorry for the German but I think you can get the idea).
The starkest difference you see is the US income distribution curve is exponential (and getting worse each year) and the German curve is linear. In the German case the top 10% of income earners earn 10 times of what the bottom 10% earn. In the US case the top 10% of income earners earn nearly 100% of what the bottom 10% earn. The US has the worst income distribution curve of any of the industrialized countries and it has one of the worst economies (G20) in terms of growth and unemployment today. Coincidence? How does this really effect the economy?
This lopsided income distribution curve can stunt economic growth in three ways:
- The top 10% can use their wealth, to monopolize their markets ensuring no upstarts can enter the market, thereby stunting new innovation and growth,
- By having a larger poorer population you in effect remove customers from the market (as they are poor with no money) which reduces demand which reduces growth. The wealthy top 10% can not consume at the same rate of the bottom 90%, and
- As a by product, higher taxes can off set government deficits, through increased tax receipts and less free entitlement spending (as the poor now can pay their own way), thereby not forcing austerity budgets that stunt growth.
The solution is simple. Make the tax structure more progressive and less flat thereby ensuring the income distribution curve goes from exponential to linear. This is one key way to revitalize growth and lower unemployment.
Now one could say that income distribution curves are a mere coincidence and can not be extrapolated in these terms (i.e. it has no bearing on the economy). If this is your view, then by making this curve more linear through progressive tax rates, as in the German case, it would not hurt the economy as these are just mere coincidences – right? So why not make the tax rates more progressive? You can not have the argument both ways.